Post Top Ad

3.30.2011

Bill Gross: the U.S. will default

The government faces two choices: default or the slow puncture of inflation. Inflation is probably the lesser of two evils, but it's no picnic, as Argentina, Zimbabwe, and Weimar Germany can attest.

... Bill Gross has come to the realization that the U.S. can never pay its obligations in anything remotely resembling today's dollars.

[...] the only way out of the dilemma, absent very large entitlement cuts, is to default in one (or a combination) of four ways: 1) outright via contractual abrogation – surely unthinkable, 2) surreptitiously via accelerating and unexpectedly higher inflation – likely but not significant in its impact, 3) deceptively via a declining dollar– currently taking place right in front of our noses, and 4) stealthily via policy rates and Treasury yields far below historical levels – paying savers less on their money and hoping they won’t complain.

Bill Gross is an optimist. "Very large entitlement cuts" won't fix things, because GDP is dependent on consumption, and consumption is dependent on transfer payments (welfare, unemployment, Social Security, and food stamps, all of which are at or near record levels). The government is running serial deficits of 10% of GDP (~70% of government revenues!!!) just to keep consumption going.

Let's put that 70% of revenues into household terms. Your family earns $100,000 a year, and owes $442,000 on credit cards (debt held by public, 4.42x federal revenues). That's not counting the $213,000 loan you took out of your 401k (intragovernmental holdings, or IOUs in the Social Security and Medicare trust funds). And every year, you spend another $70,000 more than you earn to feed your teenage daughter's crack habit, because if Buffy ain't happy, ain't nobody happy.

Now are you really going to grow your way out of that?

Now give Buffy a magic printing press that prints perfect counterfeit $100 bills. Are you beginning to see how this might end?